Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, WEST BENGAL
Vs.
RESPONDENT:
CENTRAL INDIA INDUSTRIES LTD.
DATE OF JUDGMENT07/09/1971
BENCH:
HEGDE, K.S.
BENCH:
HEGDE, K.S.
GROVER, A.N.
CITATION:
1972 AIR 397 1972 SCR (1) 619
ACT:
Income tax Act 1922, s. 16(2)--Parent company distributing
dividend to assessee company partly in cash and partly in
scrips-In computing income of assessee company from dividend
said scrips whether to be valued at face value or market
value-Considerations.
HEADNOTE:
The assessee company was holding certain shares in an
investment company which was its parent company. The amount
of dividend receivable by the assessee company was paid to
it partly in cash and partly in share scrips of two other
companies. The relevant assessment year was 1959-60. For
the purpose of assessment under the Income-tax Act, 1922 the
Income-tax Officer valued those shares as per their market
value on the date on which those shares became the assets of
the assessee company. He therefore added to the amount of
dividend purported to have been declared a sum of Rs.
61,500/- in computing the assessable income of the assessee
company. The Appellant Assistant commissioner upheld the
order of the Income-tax Officer and rejected the contention
of the assessee company that those shares should be valued
as per their face value. The Tribunal allowed the
assessee’s appeal on the grounds that : (i) the distribution
of share scrips was not a distribution of dividend, (ii) the
share scrips received by the assessee company had been
valued at their face value in the hands of the parent
company for the purpose of assessment of its profits and
(iii) the assessee company had not sold the shares and so
there could be no profit in respect of those shares. The
High. Court accepted the first two grounds relied on by the
Tribunal. In addition it relied on the circumstance that
under s. 18(5) of the Act, the assessee can get refund of
tax only on the basis on which the parent company was taxed.
The certificate granted by the High Court for appeal to,
this Court was found to be invalid because it did not give
any reasons. This Court however allowed the revenue to
appeal by special leave. On behalf of the respondent
assessee it was submitted that on a proper interpretation of
the relevant provisions of the Income-tax Act, 1922 the
scheme of the Act in the matter of levying tax on dividend
income was that the Income-tax Officer should adopt a
uniform method in assessing both the company declaring
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dividend as well as its shareholders who receive the
dividend.
HELD : (i) It is well settled by the decision in Kantilal
Manilal’s case that dividend need not be distributed in
money only. It may be distributed by delivery of property
or right having monetary value., [623 B]
Kantilal Manilal and Ors. v. Commissioner of Income-tax,
Bombay North, Kutch and Saurashtra, Ahmedabad, 67 I.T.R.
315, applied.
Further the question whether a dividend has been lawfully
distributed or not is also irrelevant in the matter of
bringing the dividend declared to tax so long as the
distributing company passes a resolution distributing
dividends. In so doing the distributing company may act
illegally and thereby incur penalties. But yet the amount
so distributed as dividend is assessable in the, hands of
receiver of the dividend in view of s. 16(2) which provides
that for the purpose of inclusion in the total income of an
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assessee, any dividend shall be deemed to be income of the
previous year in which it is paid. [623 C-D]
Kishnichand Chellaram and Ors. v. Commissioner of Income-
tax, Bombay, 36 I.T.R. 640, relied on.
(ii)It is well known that the face value of shares need not
be their real value at a given point of time. It would be
wrong to say that when shares are distributed as dividend,
the person who receives them gets only their face value in
terms of money. What he really receives is the market value
of those shares as on the date he ’became entitled to those
shares. The value of the shares distributed does not depend
on the valuation made by the distributing company. The
income earned by an assessee has to be determined by the
authorities under the Act and not by a third person. If it
is otherwise several companies may distribute their dividend
in kind and undervalue the goods distributed and thereby
facilitate evasion of tax by their share-holders. [623 G-624
B]
(iii)The question whether the shareholder retains those
shares or sells them to others at profit or loss is
irrelevant. An income does not cease to be an income merely
because the person who receives it retains it in his hands.
The fact that he receives it in kind does not make any
difference in principle. The Tribunal went wrong in
thinking that as the assessee company had retained those
shares in its own hands those shares should be valued at
their face value. [623 E-H]
(iv)The Tribunal and the High Court also went wrong in
holding that it was not open to the authorities under the
Act to value the shares differently in the hands of the
assessee company when they had valued them at their face
value in assessing the parent company. The assessee company
could not insist that the error should also be carried to
the assessment of the assessee company. No one gets any
vested right in an erroneous order. [624 G-H]
(v)Because of erroneous valuation of the shares in the
hands of the parent company, the assessee may conceivably
get a lesser amount as refund under s. 18(5) but that
circumstance could not alter the levy to be imposed on the
assessee company. There is no provision in the Act which
makes the assessment of income dependent on refund. The
provisions relating to assessment are independent of refund
through the provisions relating to refund may depend on
assessment. [625 E-G]
The appeal must accordingly be allowed.
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JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 2347 of
1968 and 1175 of 1971.
Appeals by certificate/special leave from the judgment and
order dated November 15, 1967 of the Calcutta High Court in
Income-tax Reference No. 155 of 1963.
S.T. Desai, B. B. Ahuja, R. N. Sachthey and B. D. Sharma,
for the appellant (in both the appeals).
B.Sen, N. R. Khaitan, B. P. Maheshwari and Krishna Sen,
for the respondent (in both the appeals).
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The Judgment of the Court was delivered by
Hegde, J. These appeals arise from the decision of the High.
Court of Calcutta in a Reference under s. 66(1) of the
Indian Income-tax Act, 1922 (to be hereinafter referred to
as the Act). That was a Reference made by the Income-tax
Appellate Tribunal, ’A’ bench, Calcutta. In that Reference
after stating the case, the Tribunal referred the following
question for obtaining the opinion of the High Court.
"Whether on the facts and in the
circumstances of the case the Tribunal
rightly excluded the sum of Rs. 61,656/- from
being assessed as an extra dividend income of
the assessee."
The High Court answered that question in the affirmative.
Aggrieved by that decision, the Commissioner of West Bengal
has brought Civil Appeal No. 2347 of 1968 on the strength of
the certificate issued by the High Court under s. 66-A(2) of
the Act. But the certificate given by the High Court is not
supported by any reason. Hence the same cannot be held to
be a valid certificate. Because of the invalidity of the
certificate that appeal must be held to be not maintainable.
In order to get over this difficulty, the, Commissioner
moved this Court for special leave to appeal against the
judgment of the High Court. Special Leave asked for was
granted after condoning the delay in filing the appeal and
the appeal arising therefrom was numbered as Civil Appeal
No. 1175 of 1971.
The assessee is a company. Herein we are concerned with its
assessment for the assessment year 1959-60, the relevant
previous year ending on March 31, 1959. The assessee
company was holding 458,071 shares In Pilani Investment
Corporation Ltd. (which will hereinafter be referred to as
the "parent company"). As per the resolution of the parent
company declaring the dividends, the assessee company became
entitled to receive on November 18, 1958 dividend amounting
to Rs. 1,83,228/40 Np. That was at the rate of 40 N.P. per
share. The amount of dividend receivable by the assessee
company was paid to it partly in cash and partly in share
scrips. It may be noted at this stage that the parent
company is an investment company. The share scrips
delivered to the assessee company were of M/s. Gwalior
Rayon and Silk Manufacturing Co. Ltd. and Hind Cycles Ltd.
The Income-tax Officer valued those shares as per their
market value on the date on which those shares became the
assets of the assessee company. The market value of those
shares on that date was Rs. 2,44,526/-. He, therefore,
added to the amount of dividend purported to have been
declared, a sum of Rs. 61,500/- in computing the assessable
income of the assessee
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,company. Aggrieved by that order, the assessee company
went ,up in appeal to the Appellate Assistant Commissioner.
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The Appellate Assistant Commissioner upheld the order of the
Income-tax Officer and rejected the contention of the
assessee company, that those shares should be valued as per
their face value. Thereafter the assessee company took up
the matter in second appeal to the Appellate Tribunal. The
Tribunal allowed the assessee’s appeal. It held that in
order to bring any distribution within the category of
dividend, it must be proved as a fact that what was
distributed by the company was its accumulated profits. The
Tribunal appears to have been of the view that the
distribution of share scrips was not a distribution of
profits. Hence their value cannot be considered as
dividend. One other reason which persuaded the Tribunal to
accept the appeal of the assessee company was that the share
scrips received by the assessee company had been valued at
their face value in the hands of the parent company ’for the
purpose of assessment of its profits. The Tribunal thought
that it was impermissible for the Income-tax Officer to
value those shares in one manner in the hands of the parent
company and in another manner in the hands of the assessee
company. Yet another consideration that weighed with the,
Tribunal was that the assessee company had not sold those
shares. Therefore it made no profits in respect of those
shares. So long as it retained those shares in its ,own
hands, it cannot be said that it made any profits in respect
of those shares as it cannot be said that it sold those
shares to itself for a higher price. The High Court
accepted the first two grounds relied on by the Tribunal.
In addition it relied on the circumstance that under s.
18(5) of the Act, the assessee can get refund of tax only on
the basis on which the parent company was taxed.
Before proceeding to examine the correctness of the conclu-
sions reached by the Tribunal and the High Court, it is
necessary to note at this stage that one other firm which
was a shareholder of the parent company is Ujjain General
Trading Society (P) Ltd. During the assessment year 1959-
60. the assessment year with which we are concerned in these
appeals in accordance with the aforementioned resolution
dated November 18, 1958, that Company had also been paid
dividend by the parent company partly in cash and partly in
shares of Gwalior Rayon and Silk Manufacturing Co. Ltd. and
Hind Cycles Ltd. In the assessment of that firm also, the
question arose whether it was open to the Income-tax Officer
to value the shares distributed to that company at a price
higher than its face value. The facts of this case and
that, case are identical. Therein the Appellate Tribunal (a
different Tribunal) held that it was permisible for the
Income-
623
tax Officer to do so. In appeal the Madhya Pradesh High
Court upheld the decision of the Tribunal-see Ujjain General
Trading Society (P) Ltd. v. Commissioner of Income-tax,
Delhi(1). Thus, on the same question of law two different
High Courts have arrived at two different conclusions.
It is now well settled by the decision of this Court in
Kantilal Manilal and ors. v. Commisioner of Income-tax,
Bombay North, Kutch and Saurashtra, Ahmedabad(1) that
dividend need not be distributed in money only. It may be
distributed by delivery of property or right having monetary
value. Further, the question whether a dividend has been
lawfully distributed or not, in the matter of bringing the
dividend declared to tax is also irrelevant so long as the
distributing company passes a resolution distributing
dividends. In so doing, the distributing company may act
illegally and thereby incur penalties. But yet the amount
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so distributed as dividend is assessable in the hands of the
receiver of the dividends in view of S. 16(2) which provides
that for the purpose of inclusion in the total income of an
assessee, any dividend shall be deemed to be income of the
previous year in which it is paid. This position is made
clear by the decision of this Court in Kishinchand Chellaram
and ors. v. Commissioner of Income-tax Bombay(3). Therefore
the question whether dividend distributed by the parent
company was out of the profits of that company or not is
immaterial though in view of s. 205 of the Companies Act,
1956 and S. 2(6A) of the Act, only the profits earned in the
year of assessment and the accumulated profits could have
been distributed as dividends. All that we have to see is
as to what is the income received by the assessee company in
the shape of dividends. We have earlier seen that the
income received by the assessee company need not be in the
shape of cash only. It may also be some other property or
right which has monetary value. Therefore when dividend is
received in kind, in order to find out the true income
received by an assessee, the property that has been received
by him has to be valued on the basis of its market value.
Otherwise it is not possible to compute the income received
by him. It is well known that the face value of shares need
not be their real value at a given point of time. The
market price of particular shares may be very much more than
their face value or very much less. It would be wrong to
say that when shares a-re distributed as dividend, the
person who receives them gets only their face value in terms
of money. What he really receives is the market value of
those shares as on the date he became entitled to those
shares. The value of
(1) 67 I.T.R. 315. (2) 41 T.T.R. 275.
(3)46 T.T.R. 640.
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the shares distributed does not depend on the valuation made
by the distributing company. The income earned by an
assessee has to be determined by the authorities under the
Act and not by a third person. If it is otherwise several
companies may distribute their dividends in kind and under-
value the goods distributed and thereby facilitate evasion
of tax by their share holders. Acceptance of such a
contention will be destructive of ,the very basis of
taxation of dividends. The question whether the
shareholder- retains those shares or sells them to others at
profit or loss is irrelevant. An income does not cease to
be an Income merely because the person who receives it
retains it in his hands. The fact that he receives it in
kind makes no difference in principle. What is brought to
tax in the concerned assessment year is theincome received
by the assessee and not the profits earned by himby dealing
with that income. In our opinion, the Tribunal went wrong
in thinking that as the assessee company had retained those
shares in its own hands those shares should be valued at
their face value. At this juncture, it is necessary to
mention that in some previous years also the parent company
had distributed a portion of its share holding as dividend
to its share holders. It appears, in those years the market
value of those shares was less than their face value and the
parent company valued those shares for the purpose of its
income tax on the basis of market value and not according to
their face value. The parent company appears to believe in
the saying "Heads I win tails you loose". But that is only
by the way. The only question that we have to decide is
what is the income received by the assessee company during
the assessment year in question-the income in the real
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sense. On this question there can be no two answers and the
only answer is that the income received by it is the cash
amount received plus the value of the shares received-the
real value of the shares as on the date the asesssee company
became entitled to it.
Both the Tribunal and the High Court have attached con-
siderable importance to the fact that while assessing the
parent company, the assessing authority had valued those
shares at their face value. That being so, they have opined
that it was not open to the authorities under the Act to
value those shares differently in the bands of the assessee
company. Here again we are unable to appreciate their
reasoning. Ile fact that the Department incorrectly valued
those shares in the hands of the parent company does not
confer a right on the assessee company to insist that the
error should also be carried to the assessment of the
assessee company. No one gets a vested right in an
erroneous order. Because of erroneous valuation of the
shares in the hands of the parent company, the assessee may
conceivably get a lesser amount
625
as refund under s. 18(5) but that circumstance cannot alter
the levy to be imposed on the assessee company.
Mr. B. Sen, learned Counsel for the assessee company, tried
to give a different shape to the case in the course of his
argument. He, in our opinion , rightly did not base his
arguments on thegrounds relied on by the Tribunal and
the High Court. On theo ther hand, he contended that on a
proper interpretation of therelevant provisions of the
Act, it would be seen that the schemeof the Act, in the
matter of levying tax on dividend income is that the Income-
tax Officer should adopt a uniform method in assessing both
the company declaring dividends as well as its shareholders
who receive the dividend. In support of this theory of his
he relied on ss. 12(1-A), 16(2), 18(5), 20 and 35 (9) of the
Act. Dividend is treated as income in view of S. 12(1-A).
Net dividend received by the shareholder is grossed up for
inclusion in the total income of the assessee under s.
16(2). Section 18(5) provides for refund of the tax paid on
the dividend income by the company which has distributed
dividend. Section 20 provides for the issuance of a
certificate showing the gross dividend, tax payable on that
dividend and the net dividend. Section 35(9) empowers the
Income-tax Officer to recover from the person who receives
dividend the tax in respect of the same, payable by the
company which distributed the dividend but in fact not paid
by that company within the prescribed time. On the basis of
these provisions, he urged that if the dividend paid in kind
is valued in one manner in the hands of the company which
distributed it and in a different manner in the hands of the
person who received it, then the assessee will not be able
to get the refund to which he would have been entitled to
had that property been valued properly in the hands of the
distributing company. Therefore, he urged that we must
spell out the scheme put forward by him. Ingenious, though
the argument is, it rests on no foundation. There is no
provision in the Act which makes the assessment of income
dependent on refund. The provisions relating to assessment
are independent of refund though the provisions relating to
refund may depend on assessment. Equitable considerations
are not relevant in interpreting the provisions of a taxing
statute, apart from the fact the equity pleaded in this case
is remote possibility. None of the provisions relied on by
Mr. Sen afford any basis for the scheme sought to be
established by him.
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In our opinion the High Court erred in answering the
question referred to it in the affirmative and in favour of
the assessee. For the reasons’ mentioned above we discharge
that answer and answer that question in the negative and in
favour of the Department.
L 3Sup.C.T./-/2
626
costs. Civil Appeal No. 2347 of 1968 is dismissed as being
not maintainable but without any order as to costs.
G.C,
C.A. No. 1175 of 1971 allowed.
C.A. No. 2347 of 1968 dismissed.
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